Existing-home sales surge with tax credit

First-time buyers taking advantage of a special tax credit gave sales of existing homes in October their biggest surge in 10 years, raising hopes for a turnaround in the housing market and pleasing Wall Street.

While rising foreclosures and disappearing jobs still threaten the comeback, there are now bidding wars for houses in some cities, and home sales are nearly 36 percent above their low point in January.

The National Association of Realtors said that resales rose 10.1 percent to a seasonally adjusted annual rate of 6.1 million in October, from 5.5 million in September. It was the biggest monthly increase in 10 years and far better than what economists expected, according to Thomson Reuters.

Analysts said the gains mainly reflected the tax credit of up to $8,000 for new homeowners, which was due to expire this month before Congress extended it until spring -- and expanded it to more buyers.

In the Winston-Salem area, home sales increased 13.2 percent from 416 sales in September to 471 sales in October, said Glenn Cobb, the chief staff executive for the Winston-Salem Regional Association for Realtors. Home sales were up 23.6 percent from the 381 sales in October 2008.

"Yes, the tax incentives are helping quite a bit," Cobb said. "But large inventories have helped, historically low interest rates have helped, pent up demand from two years of buyers sitting on the sidelines has also helped."

Sellers have also lowered their asking prices over the past few months, Cobb said.

The national figures released yesterday provided the juice for a rally on Wall Street. The Dow Jones industrial average, also lifted by a weak dollar, rose more than 130 points.

The extension of the homebuyer tax credit should help sustain the housing market next year, economists said. Yet the overall economy will probably benefit only slightly from higher home sales.

There are still too many factors weighing down the recovery. Foreclosures are rising. Job creation is slow. People remain reluctant to spend. And construction of new homes -- as opposed to sales of existing ones -- plunged in October.

The biggest contribution the housing industry makes to economic growth is from home building. Commissions and fees generated from home sales also help, but far less than construction.

"I wouldn't want to bet the house on housing, really, in terms of the strength of the U.S. economy going forward," said Diane Swonk, the chief economist at Mesirow Financial in Chicago."

That's partly because shoppers seem in no mood to spend. In fact, 93 percent say they'll spend less or about the same as last year, according to an Associated Press-GfK poll. Half of all those polled say they're suffering at least some debt-related stress.

Next year is likely to bring only slight improvement, given high unemployment and tight credit, according to the National Association for Business Economics. Consumer spending will rise a lackluster 2 percent next year, restraining the recovery, NABE forecasters said.

For now, the housing market is feeding on the homebuyer tax credit, falling home prices and low mortgage rates. Average rates on 30-year mortgages have hovered around 5 percent this fall.

At the current sales pace, there's a modest seven-month supply of previously occupied homes on the market. Sales are still running 16 percent below their peak in 2005, but real-estate agents say the pace has definitely picked up.

"People who are looking, they are serious," said Harrison Tulloss, an agent with ZipRealty Inc. in the Raleigh-Durham area. "They're not riding around with me if they need to go shopping or buy a turkey."

Joey Wilson and her husband made unsuccessful offers on 20 Las Vegas homes starting in midsummer before they closed on a four-bedroom, $136,000 home this month.

"It's insane," said Wilson, who moved from Kentucky. "I've never seen a market like this before."

Reduced home prices and federal programs to lower mortgage rates have brought more buyers into the market. The median sales price was $173,100 in October, down 7 percent from a year earlier and 25 percent below the peak.

Many experts predict that prices will hit a new low next spring, perhaps falling 5 to 10 percent further with foreclosures. The government has tried to counter that trend by offering the tax credit and keeping mortgage rates low.

Without the a deadline looming for the tax credit, home sales are likely to fall over the winter as buyers hibernate for a few months. Analysts say the new deadline -- buyers have to sign a purchase agreement by April 30 -- means that sales will surge next spring, before dropping back again later in 2010.

What happens after that is anyone's guess.

"When we do kick those crutches out from under the housing market, will it be able to stand on its own?" said Mark Fleming, chief economist with First American CoreLogic. "It's really hard to tell."